The European Commission has proposed a Carbon Border Adjustment Mechanism (CBAM), which aims to replace free allowances distributed to industries including steel under the existing EU ETS, but European steelmakers worry the transition will leave them without protection from foreign competitors.

Currently, the price of carbon in the EU’s Emissions Trading System stands at €97 per tonne, a 977% increase since 2012, thanks to a European Green Deal launched in 2019- which includes steeper emission cuts for 2030 on the way to reaching climate neutrality by 2050.

However, the high price of carbon on the ETS has reopened long-standing concerns about carbon leakage, an anticipated phenomenon whereby companies would move production outside the EU to avoid climate regulations. European steelmakers, whose emissions are covered by the ETS, warned they would face difficulty competing with foreign producers who don’t face similar costs.

Up till now, these concerns have been met by giving them free allowances under the ETS, effectively a subsidy scheme that rewards steelmakers with carbon credits even when they don’t cut emissions. Now, the European Commission has proposed replacing free allowances by a new Carbon Border Adjustment Mechanism under which importers would have to buy carbon certificates corresponding to the price paid by European manufacturers. Heavy industries such as the iron and steel sector have raised concerns about the timing of this transition, as they risk losing their free allowances without any guarantee that CBAM will be in place to take over.

“We’re not against phasing out of free allocations but CBAM has to be tested on its effectiveness first before free allocation is being reduced.”

Axel Eggert, director general of Eurofer, the European steel industry association.

“We’re not against phasing out of free allocations but CBAM has to be tested on its effectiveness first before free allocation is being reduced,” said Axel Eggert, director general of Eurofer, the European steel industry association.

Under the Commission’s proposal, CBAM will be phased in as of 2026 for a period of ten years, by which time EU industries covered by the scheme will stop receiving free CO2 permits on the EU carbon market, a move aimed at ensuring the system is compatible with World Trade Organisation rules.

“We as politicians need to make sure that we set up a policy scheme that works and then stick to it, and believe in what we’re doing.”

Swedish Liberal MEP Emma Wiesner

“We as politicians need to make sure that we set up a policy scheme that works and then stick to it, and believe in what we’re doing,” said Swedish Liberal MEP Emma Wiesner, who is helping craft the European Parliament’s position on free allowances. She added she wants to guard against harm to European industry by expanding CBAM in three dimensions – to cover more sectors, cover indirect emissions, and go faster.

A larger uncertainty remains, however, as even if the ETS is adjusted to take the new border charge into account, the scheme risks never being implemented if it is successfully challenged at the World Trade Organisation or if the EU drops it as a result of political pressure coming from China or the US.